Dealpolitik: Icahn’s Apple Plebiscite Is Less Than Meets the Eye

According to his tweet on Wednesday, Carl Icahn notified Apple that he is going to propose shareholders approve a resolution to increase the company’s buyback program.

But even if shareholders approve the resolution, it won’t amount to much. It would be a “precatory” resolution, meaning it would have no binding effect on Apple’s board. It is a kind of a straw poll. That is because under Delaware law, shareholders do not get to decide issues like stock buyback or dividend levels.

Those and almost all business matters are reserved exclusively for the board. That’s why directors can turn down a takeover bid even when shareholders overwhelmingly want to accept it.

So even if such a resolution passes, the board is free to ignore the plebiscite. The board likely already knows shareholders would like more cash, so it doesn’t really need to ask what they think, and may well already have in mind a plan to incrementally increase the cash going out to shareholders to throw them a bone to avoid a major revolt, on top of the buyback they’re already doing. And the pressure is not new. Remember that early this year activist investor David Einhorn of Greenlight Capital was pushing his idea for Apple to distribute “iprefs”to shareholders.

What may be more significant than the notification of a precatory resolution asking shareholders whether they are for or against more cash is what Mr. Icahn apparently did not do, or at least didn’t say he did: He did not propose any alternative candidates for directors to be elected at the annual meeting. The deadline for such a proposal passed on Friday, the same deadline as there was for the proposal he did make. An election contest would have gotten the board’s attention. If Mr. Icahn were to succeed in electing one or two directors, they could argue from inside the boardroom for a larger buyback program, which after all is where the decision on what to do with the cash will be made.

Assuming he didn’t also give notice of a proxy contest over directors by Friday, now Mr. Icahn will need to wait until the 2015 annual meeting to significantly turn up the heat on the directors.

There is likely a good reason why Mr. Icahn limited his move to a relatively benign “precatory” resolution: It is one thing for an Apple shareholder to vote yes to receiving more cash. That sounds like a no-brainer.

But to send dissident directors into the Apple board room when no one seems to be claiming the company is fundamentally broken would be asking shareholders to take on a substantial amount of risk for not much reward. If the current board decides it knows better than shareholders on what to do with the cash, the cash (or whatever it buys) will not disappear. The shareholders can fight over asking for more buybacks another day if they care to.

On the other hand, creating boardroom fights at one of the most successful corporations in U.S. history (having overcome some pretty serious ones in the bad old days) is probably not something most shareholders are anxious to see, at least in the absence of Apple management making a major misstep.

So Mr. Icahn could get his straw poll and shareholders may well say yes to more cash. But it may not mean much.